Implications for Asset Returns in the Implied Volatility Skew

Posted: 9 Dec 2009

See all articles by James Doran

James Doran

University of New South Wales

Kevin Krieger

University of West Florida

Multiple version iconThere are 2 versions of this paper

Date Written: December 9, 2009

Abstract

We dissect the impact of information contained for future asset returns in the implied volatility skew. Future returns are linked to the discrepancy between call and put volatilities of at-the-money options and to the left side of the volatility skew, calculated as the difference between out-of-the-money and at-the-money puts. We caution against using skew-based measures for forecasting equity returns without fully parsing the skew into its most basic portions.

Keywords: Option Prices, Implied Volatility Skew, Portfolio Returns

JEL Classification: G11, G12

Suggested Citation

Doran, James and Krieger, Kevin, Implications for Asset Returns in the Implied Volatility Skew (December 9, 2009). Financial Analysts Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1521126

James Doran (Contact Author)

University of New South Wales ( email )

College Rd
Sydney, NSW 2052
Australia

Kevin Krieger

University of West Florida ( email )

11000 University Parkway
Pensacola, FL 32514-5750
United States

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